Euro zone rates edge lower amid ongoing easing expectations

LONDON, Aug 20 (Reuters) - Euro zone rates edged lower on Tuesday as markets continued to focus on the prospect of fiscal stimulus in Germany and verbal easing from ECB policymaker Olli Rehn.

Finnish central bank governor Olli Rehn said on Monday that the European Central Bank’s Governing Council was determined to act if the medium-term inflation outlook continues to fall short of its target of below but close to 2%.

Hopes for additional stimulus are also rising after reports that Germany is prepared to increase fiscal spending, and after the People’s Bank of China took steps to lower corporate borrowing costs.

China lowered its new lending reference rate slightly on Tuesday, as expected, as the country’s central bank kicked off new interest rate reforms designed to lower corporate borrowing costs.

Analysts also noted that Australia’s central bank discussed unconventional monetary policy at its August board meeting, leaving the door open for further easing, having already cut rates twice to 1%.

Minutes of the Reserve Bank of Australia’s (RBA) Aug.6 meeting showed it would consider further cuts to interest rates if it was needed to support growth and achieve its 2% to 3% inflation target.

Antoine Bouvet, senior rates strategist at ING, said the RBA minutes were the most important news of the day, even though they are not directly related to rates, because of what they say about easing more generally.

“It spells out what the market is implicitly pricing: non-standard measures are difficult to withdraw,” he said. “It is reasonable for rates markets to price those measures remaining a feature for a long time.”

German 10-year government bond yields were around -0.653%, down less than a basis point from Monday’s close. Its 30-year bond yield, which recorded its biggest one-day rise since September 2017, was flat on the day at -0.135% .

Italian 10-year government bonds were underperforming in early trade ahead of an address by Prime Minister Giuseppe Conte which may lead to a confidence vote.

Investors in Italian bonds have been on tenterhooks since the leader of Italy’s far right League Party Matteo Salvini called an end to the government on August 8.

Italy’s opposition Democratic Party (PD) has had good, initial contacts with the ruling 5-Star Movement over the possibility of forging a coalition, a PD source with knowledge of the talks said on Monday.

However, there is widespread uncertainty over how the turmoil will end, with any number of options possible, including the creation of a new government that would see the League dumped back into opposition ranks.

Ten-year Italian bond yields were up four bps to 1.47% while its spread over top-rated Germany was at 212 bps. (Reporting by Virginia Furness Editing by Andrew Heavens)